Category Archives: Economics

Jeremy Corbyn’s economics 2

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o-JEREMY-CORBYN-THE-FACTS-facebookIt would appear that Newton Emerson doesn’t buy the view that quantitative easing might be about investment in real activities that promote growth but his disdain for the economic rationality of Corbynomics and his arguments opposing it are full of contradictions and holes.  So for example while he appears to see it Corbyn’s approach as dangerously radical he notes other, apparently more radical, alternatives such as giving out unfunded tax cuts or rebates, which have come from decidedly mainstream quarters such as George Bush or the head of the Financial Services Authority, who noted that the Bank of England had considered something similar.

The rationale behind Corbyn’s proposal is that the British economy needs sharply rising investment to boost economic growth.  This would produce higher levels of employment with people paying more taxes and taking fewer benefits, in the process reducing the public sector deficit and debt while realising better public services.

Newton Emerson however sees only the prospect of increased inflation because it would mean printing money and giving it to the government who would waste it, leading to rising prices.  He compares this unfavourably with simply handing out money through unfunded tax reductions (characterised as dropping money from a helicopter)or the Bank of England’s own quantitative easing explained in the first post, although he favours each of these for totally different reasons!

So, simply handing out money is good because “it is spent immediately on the high street” while the existing quantitative easing is even better because it “is a more effective and responsive version of the helicopter drop, where the cash is handed out under circumstances that ensure it will be hoarded by the banks.”  So if it’s spent that’s good and if it’s not that’s even better!

I don’t think I’m sticking my neck out very much by saying that most commentators think that the banks not lending the money but hoarding it, as explained in the last post, is a problem with quantitative easing as practised by the Bank of England and not a plus.

Of routeing the money through the banks, he says: “Better still, the moment prices start rising, the made-up pounds can be recalled and lending will instantly shrink by a factor of 20, reversing inflation in its tracks”.  Yes indeed, monetary policy usually takes around 18 months to two years but one that works instantly would be even better, except that if it worked by reducing lending instantly and by a factor of 20 the effect would be a catastrophic depression.

Emerson is right when he says that capital investment projects might take two to five years to get off the ground while the money paid on wages and to suppliers starts to be spent right away but this is an effect of any investment, state or private, so why is this only a problem with state investment?

If there were already an investment boom and a cyclical upturn that might shortly lead to overproduction and a glut of goods that cannot be sold profitably because of saturation of the market there would be a point to Emerson’s objection.  But preventing this would require some sort of economic planning, basically an end to capitalism, and he definitely doesn’t favour this.  In circumstances of a meagre upturn after a long recession it is unlikely there is constrained capacity that would lead to rapid inflation if additional money was pumped into the economy in the way proposed.

Emerson shines his Tory credentials by recalling the economic crisis in Britain in the mid-1970s in which deficit spending by the Labour party Government in 1976 led to the IMF being called in to give Britain a loan.  This shows that this sort of Keynesian policy leads only to inflation.  Four decades on, he says, the Corbyn supporters dismiss this lesson.

But his problem is two-fold.  What exactly is the lesson to be learnt and is the situation today the same as that in the mid-1970s?

The lesson drawn by certain advisors to city traders in the mid-1970s was that too much money was being created which was causing inflation and that Governments should target measurements of money supply to ensure that they do not exceed predetermined levels.  This monetarist policy was taken on board by the new Thatcher Government and dropped when it didn’t work.

But even his quoting of Labour leader Jim Callaghan in the 1970s ignores the admission in it that this policy had previously worked.  Post war recessions were shorter and less severe because of Keynesian policies.  Today’s critics of these policies now proposed by Corbyn ignore this, while Keynesians forget that it cannot solve underlying problems.  So yes these policies did lead to inflation, which increased over the post war period and eventually took off, but this brings us to the second question whether conditions today are the same as those of the 1970s?

The ‘money printing’ carried out by the Bank of England etc., which Emerson supports, is not free of inflationary consequences itself, it’s just that he fails to notice because they appear in rising property, share and other asset prices.  The policy of investment by the state at least promises investment in activities that support real production.

The Corbyn alternative is not madcap economics and is more supportive of working class interests than stuffing money into banks whose Directors were only yesterday appearing in parliamentary hearings explaining how they didn’t really know what they were doing.

Nevertheless the Corbyn policy of infrastructural investment by the state is limited in two senses and isn’t itself socialist.  First it’s investment in infrastructure where private capitalist initiative has failed.  The investment proposed is not therefore the sort that would be in competition with private capitalist production and in so far as it will be private capitalist concerns that pick up the contracts, such state investment will be a big boost for them.  Emphasis on state investment in infrastructure is something Corbyn shares with the many left electoral alternatives that have decried the desertion of old labour from its past.  They are pretty naked now it may be back.

The second way it isn’t socialist is that it is the capitalist state that is increasing its role in the economy not worker owned cooperative production, in which workers can democratically take the initiative and learn to run things themselves.  This could lay the economic and social grounds for a political challenge to the system as a whole where workers to decide they should own and run the whole lot.

There is nothing very democratic about current state ownership and the workers within it still answer to a boss.  The success of state led investment in efficiency terms is very much dependent on the developmental capacities of the state itself but when private capitalist intervention has failed it’s not a very strong argument for the likes of Emerson.

Like the rest of the shrill and desperate attacks from the right the local criticism of Corbyn doesn’t hold much water.  Others in the mainstream have recognised openly the limited radicalism in what is being proposed, which may actually be understood by those venting their disapproval.

Their opposition may therefore be motivated by fear that what is being proposed opens other more radical vistas for those seeking an alternative to austerity.  That this may well be the case is a reason why Corbyn should be supported.

Jeremy Corbyn’s economics 1

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corbynimages (12)I hadn’t even gotten out of my scratcher yesterday morning when I looked at my mobile and the BBC news web site to see what was happening in the world, only to see yet another attack on Jeremy Corbyn’s campaign for Labour party leader.  This time the Brlairite was Blair himself, looking skull-like and definitely not very well – all that chasing after money mustn’t be good for his health.  “Labour must come to its senses” he apparently said.  I didn’t read any more.

Corbyn has been criticised in just about every way imaginable, from the Mail prophesying a return to the “dark ages”, riots and intervention by international peace keepers, to the oh so condescending approach of Janen Ganesh of the ‘Financial Times’: that Corbyn’s policies, “eccentric” and a “joke” as they are, are not really the problem, it’s the “soft left” and Andy Burnham and Yvette Cooper who are the ultimate problem.  Poor Jeremy, he’s either responsible for a new dark ages or he’s such a joke he doesn’t deserve consideration, even as a problem.

At the centre of all this dismissal is contempt and ridicule of Corbyn’s economic proposals for “quantitative easing for people instead of banks.”  Our local biggest daily ‘The Irish News’ had its own columnist to hurl his own critique, this time mixing both dire prediction and condescending ridicule.

The author, Newton Emerson, thinks that fewer than 1% of the population will understand “why Corbynomics is ridiculous” even though “it takes little more than an A-level to understand why.”

Emerson is normally an acute commentator on politics in the North of Ireland, frequently exposing the hypocrisy of political culture here and the rottenness of the political arrangements.  Unfortunately he has two problems.  First, when it comes down to it he actually supports the rotten political arrangements, and secondly, he gives every indication of having been educated in the dismal science of economics as taught in the universities.

He is undoubtedly correct that the general population is seriously under-educated in economics and this is a real problem for them identifying their interests in any debate.  On the other hand I don’t believe that Corbyn’s ideas are very radical and certainly not ridiculous, so going to university or doing an A-level really isn’t the answer.

So let’s see if we can understand what the issues are in this case.

Quantitative easing as practiced by the Bank of England involves the bank loaning newly created money (created as an electronic entry in the bank’s accounts) to a fund which has to pay it back, so theoretically it’s a loan and not just giving away newly created money.  This fund then uses these loans to buy government issued bonds (IOUs payable by the Government) that are held by pension funds.  These pension funds now have money instead of these bonds.

The theory is that these pension funds will then want to use the money to buy other assets from banks such as bonds to replace the ones just sold back to the government or buy other sorts of securities such as private debt instruments (IOUs issued by private corporations to raise money for investment).

The end result is that money has been created electronically by the Bank of England and it now rests in the banks which, it is hoped, will use the new money to buy debt issued by private firms that will in turn help them invest directly through the money just received.  This investment will create jobs and economic growth.   That’s roughly the theory anyway.

However, once the banks have the money they can do what they want with it.  They could buy bonds or securities issued by other countries; they could buy existing shares or securities which would give no more money to firms to invest but simply increase the price of these pieces of paper; they could buy commodities or property and cause inflation in these assets or they could simply sit on the cash.  In each case there would be no increased employment or contribution to economic growth.

Even if they bought newly issued debt from private companies, these too could decide not to invest the money in new factories, offices or equipment and instead do any of the above and join in the great speculative boom in property or share prices etc.  Many banks and companies appear to have done just this, which has made them richer but not helped economic growth.

In other words the ‘money printing’ that has been carried out has helped the banks and made the rich who hold financial assets richer by increasing their price.

Hence the alternative proposed by Jeremy Corbyn in which the newly created money, which is also in the form of a loan, is given to a State investment bank who then loan it out to state agencies which would invest in state-owned infrastructure such as “housing, transport , digital and energy networks.”  The objective would not only be to create jobs in the short term and promote economic growth, so reducing the debt burden, but also contribute to the longer term productivity of the economy, which is recognised as going through something of a productivity crisis.

To be continued.

Why have the Irish not revolted? Part II

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imagesausterityIn my first post I qualified the view that there was something particularly weak in the resistance of Irish workers to austerity but argued that nevertheless an explanation is needed.  To develop this further we need to ask what this austerity has involved.

Some commentators would have a ready explanation.  In terms of the share of taxation in Gross Domestic Product (GDP), in terms of the share of Government spending in GDP and overall deficit as a percentage of annual value added there has not been ‘savage austerity’ so there has been nothing to rebel against.

Here unfortunately we have no choice but to enter the world of economic statistics where only the naive can expect clear objectivity and accuracy.

A post on the Irish Economy blog records that (adjusting the statistics for the well-known effect of foreign multinationals in the Irish State significantly overstating economic performance) living standards measured in GDP per person (in Purchasing Power Parity values) declined by 14 per cent from 2007 to 2011.  This is a bigger decline in living standards than in Portugal where the fall was only 1.6 per cent, in Spain where it was 4.9 per cent and Greece where it was 8 per cent.  In terms of national income (another measure) the drop was bigger – 20 per cent – and it will have fallen further since then.  It would appear that the relative quiescence of Irish workers needs additional explaining.

But does it?

Any Irish statistic that uses GDP is immediately suspect for the reason above but not only because of this.  GDP is a measure of value added which means the 2007 figure will include property produced at vastly over-inflated values.  Houses and offices built and priced at one value will have been shown subsequently to have been worth 50, 60 or 70 per cent less, or sometimes to be completely worthless.  A moment’s thought reveals that this is not a characteristic simply of Irish statistics but of measures of capitalist production everywhere.

When we think of the effects of the banking industry on measures of economic growth we again see that this measure is seriously distorting, not only because of the difficulties of capturing accurately what is happening, but because of the nature of capitalist production.  This takes place through the production of commodities whose real value is only realised after production. The value of these commodities is elaborated through the workings of the market which reveals the socially necessary value of output in a cyclical fashion.

For economists wedded to capitalism recessions are always the result of exogenous shocks outside the system or of purely irrational behaviour within it, which amount to the same thing.  For Marxists the cycle of boom and bust is how the values of commodities are established and then re-established in a constant process.  By nature therefore there can be no precise measure of value produced at any one point in time or over any one period.

In figures for GDP the distinction between use value and exchange value is absent never mind any accounting for how really ‘socially useful’ the use values produced are – ghost estates and weapons compared to commodities actually consumed by workers. This is to be considered on top of the well-known criticisms of measuring living standards by GDP.

There are alternative measures we can review but before we leave behind this discussion we should appreciate that what we have been looking at is not simple mismeasurement of economic activity but one form of the appearance of real contradictions within the system.

From the point of view of our particular investigation we can make two points.  That a critical review of some of the figures means the boom was not as boomier (to quote Bertie Ahern) as some statistics might appear to show and the recession not as sudden and complete a reversal as might first appear.  The expectation of more or less immediate revolt might therefore be less justified?  Other evidence however might suggest that such a view should be considered a relatively minor factor.

Secondly, the constant reporting of such economic statistics plays an ideological role such that workers must accept real changes to their lives on the basis of these statistics.  Workers are subject to such pressures not just in the recession but also in the boom – encouraged to get into unsustainable debt for example.  To the extent that they do the latter they are then under ideological assault to accept that they, along with everyone else, ‘partied’ and went on a ‘mad borrowing’ frenzy, as Taoiseach Enda Kenny has put it.

Some commentators might argue that a recognition of ‘guilt’ has played a role in short-circuiting resistance but the existence of such undoubted views is as much a result of demoralisation as a cause of the lack of resistance.

There are other statistics we can look at to see if there are material reasons for the lack of opposition apart from this particular ideological one.

What appears a more relevant statistic is called Actual Individual Consumption which encompasses goods and services consumed by households including government services such as education and health provision.  This would appear to show that between 2008 and 2011 living standards in the Irish State fell more than in Spain and in Portugal but less than in Greece or Iceland.

Actual Individual Consumption

State

2008 index

2011 index

Percentage fall
Ireland

109

100

8.3
Spain

99

94

5.1
Greece

104

94

9.6
Portugal

84

82

2.4
UK

123

118

4.1
Iceland

122

107

12.3

 

This measure is made up of a component of GDP so is subject to some of the criticism above.  We have already seen that three different measurements of living standards result in reductions in living standards of 20 per cent, 14 per cent and over 8 per cent, depending on dates and the measurement adopted.

What we can say with certainty is that living standards fell abruptly and significantly due to the crisis and it is not obvious that the severity of the fall in any country determined the relative extent of opposition to austerity.  It is necessary before drawing any conclusions to look at what might be at least some of the components of the fall in living standards, not by any means only a result of the effects of Government austerity policies.

By one measure unemployment in the Irish State increased from 3.4 per cent in 2007 to 10.4 per cent in 2012, a tripling of the rate in only five years.  The economically inactive, which must contain many who have given up hope of getting a job, increased from 27.5 per cent of the population aged 15 to 64 to 30.8 per cent.

Using a different measurement unemployment in the Irish state was 13.5 per cent in January 2013 compared to 17.8 per cent in Portugal, 26.8 per cent in Spain and 27 per cent in Greece.  Clearly the crisis has hit the latter countries much harder than Ireland.  It is by no means clear that higher unemployment breeds resistance since its function under capitalism is to facilitate increased exploitation of the working class.  The mobilisation of the unemployed is not always for progressive reasons, which is one reason we have noted before that economic crises often breed reactionary movements.

Once unemployed some workers face the prospect of hardship and one measure of this defined as deprivation, or being without two or more basic items, has increased from 11.8 per cent of the population to 24.5 per cent in 2012.  The possibility of this is affected by the level of welfare an unemployed personmight rely upon and this is measured by the net replacement rate, or the payments due to the unemployed as a percentage of previous net income.  This obviously depends on whether the person has children or is married etc.

Net Replacement rates 2011

 

No children

2 children
Country Single person One earner

Married couple

 Two-earner Married couple Lone Parent One-earner married couple Two-earner married couple
Republic of Ireland 50 81 75 64 75 81
Greece 49 54 75 58 63 80
Spain 79 76 90 77 75 89
Portugal 75 75 92 77 76 91

 

The table shows that Greece has significantly lower replacement rates than the other selected countries for most categories but that the Irish state’s is generally lower than Spain’s and Portugal’s.  It would not appear that the prospect of a more significant loss of income as a result of unemployment has spurred opposition in Ireland relative to that in Spain or Portugal.

The other obvious way workers cope with periods of unemployment is falling back on any savings that they have accumulated.  The following table shows the movement in net financial assets per person (€) in the various countries:

Country

2007

2011
Republic of Ireland

23,634

26,279
Spain

21,698

16,328
Portugal

19,950

19,750
Greece

19,681

10,105
Euro area (17 countries)

37,289

36,201

 

The table shows the Irish State to have the highest level of financial assets (though much below the Euro area average) and that this even increased between 2007 and 2011!  Since these figures say nothing about the unequal distribution of wealth and we know that many have suffered unemployment, cuts in wages or tax increases, it is clear that certain sections of Irish society are bearing up quite well.  In the other countries financial wealth fell and in Spain, but particularly in Greece, fell quite dramatically.

Such average figures hide as much as they reveal.  Average household disposable income in the Irish state fell from €49,043 in 2008 to €41,819 in 2011 but this was still significantly higher than in 2004 when it was €38,631.  Right wing commentators have often made the observation that incomes have often just gone back to such and such a date and we are all much better off than before the boom kicked off in the first half of the 1990s.  This is undoubtedly true for many but doesn’t provide an answer why as a class Irish workers have resisted austerity so weakly, unless the argument is that expectations have very quickly reduced.  Is this however another result of defeat or a contributing factor to it, or both?

Averages can obscure because it is precisely the unequal incidence of the effects of capitalist crisis that can have decisive political effects.

Unemployment has increased dramatically but its incidence is not uniform.  Employment in construction has collapsed, from 258,000 at the start of 2008 to 102,000 at the end of 2012, a fall of over 60 per cent.  Over the same period employment in the state sector fell from 417,000 to 381,000, a fall of 8.6 per cent.  The pitting of private sector workers against those in the public sector was a clear strategy of the Government, the employers and the media and it was quite successful.

But this has not been the only divisive effect of the crisis.  Rates of unemployment among young people in Ireland, just like other countries, have been much higher than the general rate.  In the Irish state the rate of unemployment among those less than 25 years old was 26.6 per cent in April this year while it was 42.5 per cent in Portugal, 56.4 per cent in Spain and 62.5 per cent in Greece.  These are truly staggering figures.  The rate of long term unemployment has increased from 29.2 per cent of total unemployment at the start of 2007 to 45.5 per cent at the end of 2012.  What this should remind us, is that unemployment is a divisive imposition of the effects of capitalist crisis that impacts not only on those without a job but also those in employment.  Emigration has returned and is continuing to increase, up from 87,100 in the year to April 2012 to 89,000 in the year to April 2013.

None of these figures illustrates the hardship caused by tax increases and public expenditure cuts that can affect the most vulnerable the most.  They do not include the effects on people’s experience of negative equity, the full effects of which have yet to hit home.  Here again it is younger people who are more likely to be in negative equity and to be in arrears in their mortgage payments.  And of course the figures do not tell us that the results of the crisis and austerity are to be here for a long time.

Over 32 people were unemployed for each job vacancy in 2012, while the figures for Spain and Portugal were 72.6 and 90.4 respectively.  The General Government Debt as a percentage of GDP was 117.6 per cent in 2012 while the 2012 EU Fiscal Compact stipulates that where this is above 60 per cent it must reduce by 1/20th per year.  In 2012 the in-year Government deficit was 7.5 per cent which means the debt was not getting smaller but getting bigger.  Normally optimistic forecasters are predicting that unemployment, as measured by the International Labour Organisation methodology, was only to reduce from 14.7 per cent in 2012 to 13.9 per cent in 2014.

So what are we to make of all these figures?

The fall in living standards has been significant even if not so sudden or large for some sectors of society as others and not on the same scale as some other countries such as Greece.  Certainly the disproportionate effects on young people and rise in emigration have blunted resistance but these factors exist on the same or greater scale in some other countries in Southern Europe where resistance has been greater.

It is not therefore the effects of the crisis themselves that explain the response even if these act to weaken certain social and political reactions.  The left wing economist Michael Taft has claimed that the ‘squeezed middle’, the 4th to 8th deciles of income earners, suffered declines in direct income in the five years leading up to the crash, gaining only as a result of social transfers.

During the boom the level of trade union organisation fell relatively as union density dropped from 46 per cent of the workforce in 1994 to less than a third in 2007, and only 16 per cent in the private sector.

Thus even during the most favourable circumstances, when workers are best placed to protect and advance their living standards, they were unable to do so with their own strength.  During recession such weakness is exposed.

Now they are subject to the vicious laws of the capitalist market and, as we said in the first post, short of overturning the system there is a limited amount workers can do about this without challenging the system itself.

During this post I have said that workers have not resisted austerity but in truth the great mass of unemployment, insecurity caused by mortgage arrears and negative equity, and the drop in personal consumption are not so much the result of the austerity policies of the Government, which of course have made things worse, but of the capitalist crisis.  This crisis can in certain circumstances be postponed or ameliorated by the State but it cannot be suppressed and certainly not by a State in bankruptcy.

When even during the boom large number of workers dependency on this state increased rather reduced and rather than their developing their own independent power, it can be little surprise that when the state turns round and kicks them in the teeth they are unprepared.

Some socialists argued again and again during the boom that social partnership, the vehicle by which the Irish trade unions hitched themselves to the State, was to be opposed not mainly because it prevented workers making gains in their living standards that they should but because it rotted away their independent organisation.  This has not just organisational consequences but political and ideological ones and it is to these that I need to look at next.

The new bank deal and the working class

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debt maturityThe most important aspect of the deal that has replaced the promissory notes is not what it entails but what it does not entail. It does not involve a write off of any of the debt so that less would have to be repaid and interest burden on the debt lowered. It does not involve the European Stability Mechanism, in effect the EU, directly funding the banks which appeared to be the deal offered last June and it does not affect all the bank debt.

The deal on the promissory notes affects €28 billion of a total debt at the end of last year of €192 billion and relates to less than half that incurred in bailing out the banks. The Government has not changed its austerity targets. The editorial in the Financial Times stated that ‘restructuring the promissory note does not make the public liability for bank losses lower, just easier to bear.’ Easier to get workers to pay is more accurate. All the questions regarding how the deal will work have not been answered, which also demonstrates continuity with the promissory note arrangements that were understood fully by very few despite the enormous impact on people’s lives.

Never mind, the Taoiseach proudly told us that the “stains on our international reputations and dents to our national pride, have now been removed from the financial and political landscape”. This is a statement so revealing of the shallow moral argument for the deal, so instructive of the concerns of the elite as distinct from the majority and illuminating of the poisonous demands of national identity that despite its odious character it would be good to see it repeated again and again and again. The Irish people have decades to ponder how satisfying it is to pay for so long to erase such an embarrassment.

As for the new deal itself, it involved the liquidation of IBRC, which was the combination of Anglo-Irish bank and the Irish Nationwide building society. The Government will still pay €1bn to the bondholders of Anglo, as part of the 2008 guarantee, so no bondholder is left behind, and more rotten loans in Anglo will transfer to NAMA, which promises further losses down the road. Loans left in Anglo totalled €15bn.

It involves tearing up the promissory notes that provided the means for the State to get money from the Irish Central Bank (ICB), the local branch of the European Central Bank (ECB), to be replaced by ordinary government bonds, which are really just a more regular IOU used by states. This allows the state to keep the money loaned to it on the back of the promissory notes instead of having to pay it back when the notes were torn up. The state will still have to pay the money back and pay interest but will have much longer to pay and with what appears a lower rate of interest. Both of these are good things – having longer to repay and being charged less for the loan, but both are not as good as they appear.

The longer you have to pay the more you have to pay back, just like any mortgage. The lower interest rate is not such a change for the reason explained in the last article. This is because the high rate of interest paid by IBRC (8.2 per cent) to the Irish Central Bank, which the taxpayer ultimately funded, was used by the ICB to pay the ECB which charged a much lower rate of interest. The difference was returned to the Irish State so the effective rate of interest was not they headline rate of the promissory note. The reduced interest cost between the promissory notes and the government bonds is therefore not what it might appear.

But this is not the only reason the savings might not be so great. The ICB will have an asset, the bonds, the ownership of which entitles it to receive interest every year and receive repayment of the principal. Part of the deal is that the bonds are sold to private capitalists, €6.5 must be sold by 2022. How quickly they must be sold is not at all clear and thus neither is the cost of the deal, although this has not prevented the Government, media and commentators continuing to welcome the deal and proclaim its savings as if they were hard fact.

In selling the bonds the Government will in effect be raising new loans. If for example it attempts to sell €1bn worth of these bonds and investors don’t think the interest they would get on them is high enough they may be willing only to pay €980m, €950m or €930m instead of the €1bn. In other words the bonds would be sold at a loss and the tax payer would foot the bill. To replace the loss would require more loans costing more.

The rate of interest charged on the bonds over their lifetime is not known so calculations of how much the new deal will cost must make more or less educated guesses of how much the deal will actually cost over the long term. The longer the term the more the ‘educated’ guess becomes ‘pure’ guesswork.

Nevertheless within a couple of days estimates of savings on an NPV basis were quoted and savings of €8bn announced. Net Present Value (NPV) analysis allows one to calculate and compare amounts over different time periods recognising that someone would rather pay €1 in 10 years’ time than pay €1 today. It allows one to say whether it would be better to pay €1 for each of the next 9 years and €11 the following year or pay €2 for the next 10 years. In both you pay €20.

The money paid in the future is discounted so that €1 paid in ten years’ time is less than €1 paid in 5 years’ time which is calculated as less than €1 paid in 3 years’ time. How much you reduce the amount depends on the discount rate and this rate can have a big effect on the result. The rate chosen is another variable that is a guess, first educated and then pure.

The higher the discount rate the less costly future costs become which offsets the fact you are paying longer and on the face of it more. So one could be paying €21bn equally over 20 years instead of €19bn equally over 12 years but because the first means the money is paid off later it is worth less and the total cost on an NPV basis is less. In the example above an NPV calculation at a discount rate of 6 per cent shows that the first payment schedule costs €11.2 in NPV terms, where €11 is paid in the last year, and €14.7 in the second where equal yearly payments of €2 are made.

In the new deal the first repayment of principal is not until 2038 and the last in 2053. The NPV savings in the new deal were worked out by one economist as €8bn and then by a couple of others as €4bn, a whopping difference of 50 per cent of the first estimate. Another economist has stated that almost all of the calculated savings disappear if the timing of the sale of the government bonds to the private sector is accelerated. Factor in the loss on sale to the capitalists plus increased interest costs and the deal might very well cost more.

A final argument has been much quoted, and certainly more often than the lack of robustness of the savings estimates. This is that inflation will erode the real value of debt repayable by our children, who will be middle aged when they might finally pay it off. This means that, if say the interest rate is 5 per cent and inflation is 3 per cent the effective rate of interest is only 2 per cent. Also the real value of the money repaid in thirty years’ time will be less because of the cumulative reduction in the real value of the debt by this inflationary process.

It might otherwise be amusing to listen to these experts, who gave us a property ‘soft landing’ and now the wonderful benefits of inflation, except that we can state with absolute certainty that they will also be lecturing us in the future on the evils and futility of seeking pay rises to compensate for inflation because these will only increase it. Not only will interest rates rise in response to higher inflation thus limiting the effect above, which will also put up the cost of mortgages, car loans and credit card debt etc. but higher inflation will also erode living standards. What workers might gain from erosion of the real value of the debt they will surely lose by the reduction in living standards caused by an increased cost of living.

By now it should be apparent that the deal’s main benefit is putting off repayment of the loan principal thus making it less likely the state will have to default. In other words the main beneficiaries are the State and the ECB, which is sanctioning the lending of the money and protecting the European banking system. What is good for the state, that it continues to pay and does not default, is bad for workers who will really do the paying.

The second benefit is that the low interest rate charged for the money the state gets in exchange for the bonds will be around longer. However as we have seen, how much longer we don’t know. It won’t be our decision when it goes up (through selling the bonds to the capitalists) because this is a decision of the European Central Bank. Such a decision will cost us billions but we have absolutely no say in the matter. Yes, we live in a democracy.

Once again it is necessary to educate workers that they must distrust the state as much as they would distrust an email from Nigeria asking for their bank details. (The power of the state means it doesn’t need them.) We need to remind them that the state is able to foist the debt of Anglo and Nationwide on them because it nationalised these institutions. We need to inform them that both the Irish Central Bank and European Central Bank are institutions of the state deliberately designed to be protected against any kind of democratic pressure.

This brings us to a couple of questions a reader asked me about the promissory note deal. He asks how the government borrows from the central bank as if it is separate institution. “To me it looks like the government is borrowing from itself, but if that is the case why doesn’t it borrow some more?”

The first answer is that with so much debt the Irish State cannot borrow more from the markets (private capitalist funds) which is why the EU and IMF stepped in to loan the money. It can’t borrow more from these institutions because they want the state to reduce its indebtedness and pay them back their existing loans.

The second answer is that the Irish Central Bank is a branch of the state and a normal central bank can both provide loans and ‘print money.’ There are limits to the former if, as we have just noted, the state won’t be able to pay the loan back. In this case it is if it makes a loan that isn’t repaid just printing money. Printing money will at some point lead to a devaluation of the currency meaning that the Euro will be worth less and buy less making everyone across the Eurozone worse off when it has to buy goods from countries that don’t sell in Euros.

To protect against this the ECB has a firm grip on money printing and the deal on the promissory notes and the new one involving the issuing of bonds required its approval. The Irish state is part of the Euro so doesn’t control its own currency or it could try to get away with printing some money, although in reality it is too weak to be able to do so even if it went back to the Punt.

The ECB is taking control of the timing of selling the bonds because printing money in exchange for bonds that don’t have to be repaid for years is so close to money printing it really is printing money.

The rules of the ECB prevent it funding states and public institutions directly for this reason. It has however ended up with Irish government bonds in exchange for funding the IBRC. Because it ended up in this position indirectly by funding a bank (public banks must be treated just like private ones)rather than a government and through the receipt at first of promissory notes rather than regular government bonds this has to a very little degree been hidden.

This is why they’re not very happy with the deal and might also be why they will quickly ensure the bonds are sold to private capitalists; thereby entailing an interest cost more reflective of the market. As I have said, this will cost the Irish people a lot of money.

In the next post I will look at whether the new deal has solved the debt problem.

The promissory notes and the working class

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The response of the mass media to the deal on the promissory notes was one of considerable praise to a Government that had won a deal that “appears as good as could have been hoped for”.

The world of finance is notoriously complex so in simplifying the deal for a mass audience the media felt free to simply lie.  Thus the headline in the Irish Times said that the ‘Bank debt deal to cut borrowing by €20bn and ease next budget’.  The small print revealed it would only reduce the amount paid in the next decade and the debate after the deal has revealed that there is no certainty that the next two budgets will be any less severe than planned.  The Troika and others are demanding the original targets are adhered to and being a poster boy of austerity might demand it.  The uncertainty surrounding important aspects of the deal leaves open to doubt many of the claimed benefits.

But one thing is very clear: the bank debt was unsupportable despite the responsibility of all the parties for placing it on the shoulders of the Irish people and something had to be done to prevent a disorderly bankruptcy.  This would have been caused by inability to raise the financing required to run the State at remotely affordable interest rates.  The average maturity of the main sovereign debt of about €80bn is around six and a half years, which has to be renewed by borrowing this amount again to pay it off – ‘rolling over’ the debt.  Combined with a possible promissory note repayment of over €28bn averaging five years and continued deficits this looked close to impossible.

Not that anyone dared point out that the deal exposed the lie of the Government parties, of the previous administration, and of the current Governor of the Irish Central Bank that the deb was ‘manageable’.

Ignoring this also allowed the media to largely stay clear of why this deal was necessary in the first place.  The Irish State had decided it would protect the investors in two thoroughly rotten institutions, run recklessly by their owners, by promising them that the Irish working class would pay off their gambling bets.

The Irish State never asked workers whether they wanted to, or whether they thought it was a good idea, but conceived the original bank guarantee in the middle of the night, as a scheme concocted without even the presence of cabinet ministers who were supposed to make up the Government.  In effect it decided to pledge money it didn’t have to people we still did not know and get everyone else to pay for it, including generations not yet born.

As ever we are bombarded with propaganda that cuts must be made in wages and services; increases must be applied to taxes, charges and working hours and all because we need to be competitive.  Yet billions that could not possibly be afforded were pledged and paid that bankrupted the State.  This in turn necessitated a ‘bail-out’ by the EU and IMF, which is akin to a blood transfusion to a dying patient so that she can work to earn money to pay the vampire.

As the Croke Park deal is ripped up and more draconian conditions inserted – not ‘extended’ as claimed – on the back of demands for austerity, no austerity is to be inflicted on the capitalist gamblers.  While money can be wasted on dead banks money must be cut out of wages and services because ‘we’ can’t afford it.

This is the logic of the capitalist system but it is hidden not just by the mass media and politicians but by the opaque workings of the capitalist system itself, made more complicated by the complexity of the financial system.  This complexity is useful because when it is more difficult to understand and appreciate what is going on it is more difficult to fight against it.  Only vague ideas that you are being screwed do not help give you confidence to say stop!

That is the importance of understanding as much as possible what the promissory note deal involves.

When the State guaranteed the liabilities of the banks in September 2008 it claimed the problem was one of liquidity, that is the banks were basically sound but were in danger because they would not lend to each other.  There might also be a withdrawal of money by depositors.  This was the purest rubbish and the gamblers who had put their money into Anglo-Irish Bank and Irish Nationwide didn’t buy it.  They took their money and ran.  Deposits in these institutions, packaged together as the Irish Bank Resolution Corporation (IBRC), fell from €65.8bn at the end of 2007 to €1bn at the end of 2011 while the value of debt securities funding the IBRC fell from €30.85bn to €6.3bn during the same period.

So if the IBRC was bust where did the money come from to give to the depositors and holders of the IBRC debt?  The answer is that it came in the form of Exceptional Liquidity Assistance (ELA) from  the Central Bank of Ireland (CBI).   This ELA funding to the IBRC was zero in 2007 and €40.1bn at the end of 2011. ELA is money so the question is where did it come from, how did the CBI get it?

In many ways the CBI may be thought of as the Irish branch of the European Central Bank (ECB).  The ECB has strict rules about money creation (money printing) so the local branch in Ireland could not just print Euros (metaphorically speaking) although this is one of the things Central Banks can do.

Nevertheless the CBI was able to give money in the form of ELA to IBRC which then paid off its depositors and holders of debt securities.  Since this bank and building society were broke the state nationalised them making all their reckless speculation our reckless speculation and making their debts everyone else’s debts.  Because the State didn’t have the money either to pay back the speculators they issued IOUs to the Central Bank of Ireland in return for their money’ the ELA.

The result was that the CBI gave money to the State in the form of IBRC and the State gave the CBI promises to pay this money back with interest.  Although the two institutions that became the IBRC had issued loans which were due to be repaid many of these were worthless so only through the state intervening could the capitalist investors in these institutions get their money back.

The promissory note IOUs were the promise by the State that through tax increases, wage cuts and public service cuts the working class would ensure they got their money.  This is what prevented the ELA being simply money printing and thus prevent the CBI holding worthless pieces of paper.

So the cuts to wages and public services that are justified by the claims that we need to be competitive are partly in order to pay the debts of a very uncompetitive bank.  So uncompetitive it is now dead, having been in a zombie-like state for the last few years.  When the State pays part of the promissory note IOU to the CBI the Irish Central Bank has ‘taken the money out of circulation’, again to ensure the problem is not solved by printing money.  In other words the money workers paid through austerity is simply burnt (again metaphorically speaking).

What could be more uncompetitive than maintaining dead banks on life support through burning money by putting real people on the dole and cutting services such as education?  The promissory note episode is one object lesson in the irrationality of the capitalist system.

This course of action could not have been taken by the Irish Central Bank and the Irish State without the approval of the European Central Bank and the European Union and its Commission.  For them the over-riding concern has been the protection of the European banking system just as the main objective of the Irish State has been the protection of the Irish banks.  Nationalist complaints that the Irish have made sacrifices for everyone else, much trumpeted by trade union leaders, has to ignore this.

If Irish workers have paid more so far it is because the Irish banks have been weaker and more rotten and Ireland remains a subordinated country which is dependent on foreign money for its speculative bubbles.

If the Irish State’s attempt to save the banking system required the ultimate liquidation of the IBRC this is because there was, in the end, little left to save after all the depositors and holders of its debt securities had been paid.  Again only the workers, in this case of the two institutions, are threatened with picking up the bill through redundancy.

For the Irish State this promissory note device to ensure that it did its best for European banks (and its own) had some advantages and disadvantages.  Of course inability to actually afford it is one big disadvantage but if it can get workers to accept austerity then this is not such an insurmountable obstacle.

The ECB does not want to lend money to institutions that cannot pay it back and since IBRC was bust its actions in approving the lending by its local branch raised some controversy.  If for example it lent to a bank that went bust and which didn’t pay back the money lent this money would then have entered the economy (through those people the bank did pay back, its employees or new loans) and this would amount to money creation/printing.  This can create inflation and low inflation is the primary objective of the ECB.  A strong currency allows a state, or in this case the Eurozone, to command greater resources on the world stage and is thus integral to the project of a strong EU imperialism.

The ECB thus regularly monitors (every few weeks) its ELA so their approval or otherwise was always hanging over the Irish State, although even without this it remains under close and regular scrutiny.

An advantage of the promissory note arrangement that will be lost at some stage with the new deal is that because the State owes the money to the Irish Central Bank profits by the ICB on the loans can be returned to the Irish State.  Given the high interest rate of over 8 per cent this is important.

Because a lot of the ELA created by the Irish Central Bank has ultimately been paid by IBRC to banks and institutions in other EU states the ECB has had to lend money to the ICB so that the reserves of the Irish Central Bank do not decline dramatically.  The ECB charges the ICB for this money but at a low interest rate so that the difference between this low interest rate charged to the ICB and the higher interest rate charged by the ICB to IBRC is a profit which can go to the Irish State.

What this means in terms of the current benefits of the new deal is that the move to a lower interest rate on the Government bonds that replace the promissory notes is not a gain since the effective rate of interest actually paid on the notes is the rate charged by the ECB to the Irish Central Bank and not that charged on the promissory notes.  As explained the profit generated by the latter is taken by the Irish Central Bank and returned to the State.

In the next post I will look at the new deal to replace the promissory notes.

BBC ‘Masters of Money’ considers Karl Marx (Part 2)

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The BBC programme was called ‘Masters of Money’ and was ostensibly all about money but there was nothing said about Marx’s theory of money, which is fundamental to explaining the current economic crisis.

For mainstream economics money is essentially just paper that can be used to exchange commodities.  Provided it is not issued in too high a quantity it will maintain its value and is useful for this purpose.  Already we can see a problem.  What is the intrinsic value of pieces of paper or metal coins?  If it had an intrinsic value its issue would hardly be a problem. It becomes a problem because paper money cannot fulfil all the functions of money precisely because it does not have an intrinsic value.

The massive expansion of credit makes credit too look like money in that it is used to exchange commodities.  However at a certain point people want paid with money and not yet more credit.  When this happens credit stops being given to some people and we have a ‘credit crunch’ such as developed in the latest financial crisis when banks refused to lend to each other and Governments had to step in.

For Marx money is itself a commodity with an intrinsic value because it too is the product of human labour.  Historically it has taken the form of gold.  This is why commodity exchange is an exchange of equals because when money is exchanged for a commodity the money is either gold directly or indirectly if it is convertible into gold.  The end of such convertibility does not abolish exchange being one of equivalents.  Just as credit cannot become real money and this is proved during a credit crunch so paper money is exposed when it is over-issued and creates inflation and when in a crisis capitalist investors look to put their money into something that will preserve the real value of their wealth.

In fact this occurs during booms when speculation on one type of asset after another leads to bubbles – in high-tech company stocks, houses, commodities and now certain government bonds. The price of oil is one barometer of this activity.

Thus just as the massive expansion of credit is not a solution to the problem of capitalist crisis and the contradiction between a limited market and profitable production so also is the printing of money through quantitative easing not a solution.  Yet according to mainstream economics there is no reason why printing money should not be a solution.  The proof of the pudding is that while quantitative easing  has prevented collapse it has not abolished the crisis.

Many companies are sitting on piles of cash including US multinationals holding money outside the US and so evading US taxes.  There is an ‘investment strike’ because of the recession which has created unemployment, falling incomes, debt crises for many countries and austerity which promises not a recovery but continued recession.  All this is worse in Ireland because it is not mainly the policy of austerity which is the problem but a massive overhang of debt, which must otherwise be repaid, and shrinkage in demand due to lower wages, unemployment and emigration.

We are back to ‘solutions’ that are based on more investment and higher wagers but which ignore that it is the system based on profit which is the cause of the problems.

Two other issues occupied the last part of the BBC programme.  The first was whether capitalism would last more or less forever or would be temporary and replaced by something else. The programme accepted that Marx’s analysis of capitalism had a lot of sense to it but it did not, to no one’s surprise I am sure, think that he had any alternative.  In fact the very scarcity of his views on this was held up a number of times while recognising that no one else had much of a clue either.

This was more than a little disingenuous.  The programme started off with shots of the Berlin Wall being demolished and of pictures of Red Square in Moscow and of Stalin.  The presenter recalled that she was at university at the time the Berlin Wall came down and one thing she was aware of was that ‘communism’ had definitively failed. The programme she said would therefore not look at what Marx had to say about communism.  To return at the end of the programme and say that Marx had no alternative while excluding what he did say about an alternative is, well, not exactly fair.

Also unreasonable was the nonsense that Marx, although he had been poor, had towards the latter years of his life become a bit bourgeois.  This seemed to consist of such things as worrying over the future of his children and taking walks in the park in quite nice areas of London.  What a traitor!  He hadn’t even been down a coal mine, unlike the presenter who went down one for the programme.

That leaves me a bit conflicted as I worry over my children, like nice walks in the park (sometimes) but have been down a coal mine (once).

More importantly the programme argued that Marx had no alternative and implied that this explains the otherwise puzzling phenomenon, gleefully expressed by ex-Tory Chancellor of the Exchequer Nigel Lawson, that many people were not flocking to the banner of Marxism.  The latter is a fact, so is it the result of the former?

In an earlier post on the defeat of the opposition to the austerity referendum I asserted that the Left and the working class generally did not have a real alternative, as opposed to some theoretical one, and that this was fundamentally why many workers had voted for something that was against their interests and which some knew to be the case.  The programme actually expressed very well what is meant by an alternative, if I recall more or less accurately, it said that this would be when ‘a compelling alternative would appear.’  What is this ‘compelling alternative’?  If we are talking about the replacement of the political economy of capitalism we are also talking about its replacement by the political economy of the working class.  What is this?

Marx described the alternative to capitalism this way:

“But there was in store a still greater victory of the political economy of labour over the political economy of property. We speak of the co-operative movement, especially the co-operative factories raised by the unassisted efforts of a few bold “hands”. The value of these great social experiments cannot be overrated. By deed instead of by argument, they have shown that production on a large scale, and in accord with the behests of modern science, may be carried on without the existence of a class of masters employing a class of hands; that to bear fruit, the means of labour need not be monopolized as a means of dominion over, and of extortion against, the labouring man himself; and that, like slave labour, like serf labour, hired labour is but a transitory and inferior form, destined to disappear before associated labour plying its toil with a willing hand, a ready mind, and a joyous heart. In England, the seeds of the co-operative system were sown by Robert Owen; the workingmen’s experiments tried on the Continent were, in fact, the practical upshot of the theories, not invented, but loudly proclaimed, in 1848.”

(http://www.Marxists.org/archive/Marx/works/1864/10/27.htm)

The beginning of an alternative to capitalism arises only when the working class takes action, however small, and is not limited to creation of worker owned and controlled production.  The creation of its own organisations to defend itself against capitalism also foreshadows its future control over the whole of society.  The creation of its own workers party is the pinnacle of it being conscious of its tasks.  Many of the political organisations claiming the banner of the working class and the mantle of Marx replace the centrality of the working class itself with calls upon the state, the capitalist state, to take the action only the working class can take and only which if it does take, can it be considered any step towards socialism.

So the BBC programme on the alternative of Karl Marx got his essential teachings wrong but unfortunately, through empirical impressions, got the current weakness of the socialist alternative right.  The programme itself however is an indication that this alternative is as necessary as it ever was.

BBC ‘Masters of Money’ considers Karl Marx (Part 1)

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BBC Karl MarxAs part of its ‘Masters of Money’ series the BBC 2 programme, which looked at the ideas of John Maynard Keynes and Friedrich Hayek, finished by looking at the economic ideas of Karl Marx.  The overall verdict?  It could have been a lot worse.

There were of course huge simplifications that erased exactly what Marx was saying.  These could have been avoided, and the dismissal of communism and what Marx had to say about it was on a par with cold war contempt, but despite this there was a coherent argument through the programme.

It was very much the creature of a mainstream bourgeois economist albeit one who thought there were important insights to be found in Marx, particularly his perspective on the inequality of capitalism and its instability.  It avoided some cheap shots and pointed out that Marx appreciated the revolutionising of production achieved by capitalism and its dynamic development across the world.  The presenter Stephanie Flanders repeated the often made observation that Marx’s description of capitalism is more true now than when it was first made.  She also correctly observed that profit is the soul of capitalism and made some correct remarks about the compulsive nature of the drive for profit within the system.

There were some strange observations which tried to tie the relevance of Marx’s views to particular periods which excluded the post war boom and included the 19th century but excluded the great depression of the thirties.  The whole point of the programme however was to assert the relevance of his views today and if it did no more than this then it must be judged positively.

There were some problems that, had they been addressed, would have made for a much better exposition of Marx’s ideas.  The first is that the programme avoided what Marx thought was his greatest economic discovery – the nature of surplus value.  This is the discovery that the economic value created by capitalism is the result of human labour and can be measured by the labour time necessary for its production.  The source of capitalist profit is the result of the difference between what the capitalist pays for this capacity to labour and what this labour actually produces.  This explains how a surplus can be produced and a profit arise when the exchange of commodities, including labour power, is the exchange of equivalents. It is not a question of workers being cheated when they receive a wage in return for their labour power or of unequal exchange of commodities.

This is not a particularly difficult concept to explain but it does very clearly reveal the exploitation of the working class and exposes all the hypocritical justifications of the system.

The second problem is not what was left out but what was included, that Marx held that the absolute level of wages would be held down under capitalism.  This doesn’t sit well with the programme’s acknowledgment of Marx’s view that capitalism develops the forces of production.  Who did Marx believe would buy the goods created by the development of these productive forces?  This of course was the central tenet of the programme: that for Marx this was precisely the problem.

Marx’s argument was held to be that the tendency to lower wages reduced the ability of workers to buy the goods they produced.  Increasing wages would only reduce profits, the objective of the system, so this is not a solution.  As a temporary ‘fix’ the system expanded credit to make up the shortfall in wages and allow all the goods produced to be purchased.  The explosion of credit therefore explains the current economic crisis emanating within the financial services industry.  The programme was actually quite good when it cut to the right-wing talking heads who pooh-poohed the idea that low wages contributed in any way to the crisis.  They looked neither comfortable nor convincing, or maybe that was just me.

The programme argued that Marx’s criticism went much deeper than any other but actually the programme didn’t go deep enough.  Not altogether its fault since there is widespread debate among Marxists about the causes of the current crisis and even about the fundamental mechanisms of what might be called ‘classic’ capitalist crises.

What can be said however is that the description of the crisis given in the programme and the role of credit and wages is only how the crisis manifests itself, not how it is caused.  To explain the latter would require one to start with the idea ignored – surplus value.

If low wages restricting the market were merely the problem the question would not be so acute.  The capitalists who had diddled the workers could simply purchase what the workers did not.  Everything would then be sold.  The problem is worse because the workers create added value over and above what they are paid, over and above what is required to maintain production and also above the conspicuous consumption of the capitalists, and this additional value produced must find a market.  Why can’t this too be solved by the capitalists buying the difference?

The answer is that it can but the question then is what is the result of this?  Additional value appropriated by capitalists can expand their luxurious lifestyles but the driving force of the system is not this but profit.  To increase this means expanding production both to garner extra profit and destroy competitors.  This means the capitalist must employ the additional value produced by the workers to further invest in more workers and also machinery, raw materials etc to expand output.  The problem is intensified as production increases, new markets are sought for the things that are produced and the amount of surplus value (unpaid labour) created is expanded.

In the longer term the rate of profit comes under pressure as the capitalists replace workers with machines in order to produce more cheaply or even to produce some goods at all (some high-tech ones for example).  However because profit comes from workers the value of production comprised of workers labour declines and so does the proportion made up of surplus value, from which profit comes.  Fewer workers will create proportionately less surplus value while the cost of machines and raw materials etc increases relatively, so reducing the rate of profit.  The capitalists with the lowest productivity and lowest profitability can be forced into bankruptcy.  Of course to some extent this too can be offset by lower wages but the increasing sophistication of production means that paying peanuts will not allow the ‘monkeys’ to engage in the skilled labour required.  This is a long term tendency but one we can see in operation through the economic history of the west and in the rapid economic development of Asia.  It implies that profit plays a smaller and smaller relative role in production which calls into question a system in which this is the whole purpose of its existence.

The regular periodic crisis, including the current crisis, is the route by which this longer term tendency operates.  The compulsion to produce more and more surplus value also produces these more regular booms and busts.  The drive to expand the creation of surplus value means increased accumulation of workers, machines and materials and the expansion of markets to purchase the additional production.  In an economy dedicated to the needs of the population such increased production can be consciously planned and coordinated and its limits set by society as a whole.  Under capitalism no such limits are acceptable.

The limits on production of surplus value are therefore not set by the needs of society or by the limits of the purchasing capacity of workers and capitalists.  To break from these limits credit is expanded to bridge the limitations on consumption that are the result of the limits of production.  Through credit capitalism seeks to satisfy the capitalist desire to expand production through the accumulation of more and more surplus value.  Credit expands the market for increased surplus value production.

This can produce fantastic economic booms of the sort we have seen in the last decade or so in Ireland and across much of the globe, from China to Brazil.  The attempt to expand real production and to create an even larger market for it must at some point necessarily collapse for the same reason that credit is originally introduced.  Just as increased credit is an attempt to increase profit so the collapse of credit is the result of credit no longer being able to expand profitable production.

Workers must pay back debt at some level and beyond a certain point this becomes impossible because of the limits to their real incomes determined by real production.  The same is true of the capitalists.  Ever more convoluted attempts to expand credit beyond the capacity to pay it back – through creation of yet more credit – is doomed to collapse as the ever expanding amount of debt requires greater and greater repayments to keep it going.  The fantastic expansion of the financial services industry is testament to how big such an exercise can become. A glance at the size of the balance sheets of the Irish banks in comparison to the size of the whole economy reveals the scale of the overproduction and credit expansion that can arise.

In Ireland and the US the limits were reached when workers could no longer pay for inflated housing or capitalists pay for inflated office and other building construction.  A surplus of such properties is eventually created, overproduction appears, prices collapse, capitalists cannot sell except at a loss and those who built the houses and offices go bankrupt, workers in construction are made unemployed and the banks which financed it all go bust.  At such points it can appear that the problem is that workers wages are not big enough to buy all that has been produced and that this is the problem.  Solutions are proffered by Keynesians who say that what is need is yet more investment to take the place of that which has just collapsed.  But as we see, these solutions do not address the underlying problem and provide a ‘solution’ only by postponing the collapse and stoking up a bigger tsunami when the boom busts later.

In these circumstances blame is also placed on the institutions which created the massive credit explosion – the banks – especially since such booms inevitably involve hugely speculative, criminal and stupid behaviour during a time when everyone thinks they should be getting rich quick.   No one needs regulation during a boom when money is being made and afterwards the call is made that we have to have stricter regulation when again, but for opposite reasons, no one needs regulation.  Regulation becomes the alibi for the systematic failures of the system.  Left wing critiques which focus on the banks play into the hands of those who want to ignore or are simply ignorant of the system itself being responsible for the bust.  That the bust is so spectacular is simply a result of earlier failure to burst the bubble.  For a longer and bigger boom the price paid has been a longer and bigger bust but either way capitalismproduces booms and crashes.  Keynesian solutions to extend the boom can simply create bigger crashes.

Forward to Part 2